Paragon Commentary

Futures File: Livestock & Oil Drop

Apr 17, 2020

Pandemic Closes Meatpacking Plants

Numerous beef, chicken, and pork processing plants have closed or reduced capacity amidst the COVID-19 outbreak as employees have fallen ill. Employees often work and even live in close quarters, making meatpacking an industry especially exposed to the outbreak. So far, closures may be reducing current processing by as much as 25%, which is creating a meat shortage and backlog of slaughter-ready animals.

The first round of meat shortages in the United States over the last month were short-term and driven primarily by a massive spike in demand. However, this current drop in production will likely create supply shortages as high consumer demand outstrips reduced production.

For farmers, these plant closures will be devastating, as many producers have market-ready animals that they cannot sell. This creates not only a cashflow problem for them, but it also creates a logistical backup as they may not have physical space for new piglets or feeder cattle that were intended to replace the unsellable animals.

Worse yet, unlike other commodities that can simply be stored, animals continue to need to be cared for and fed, creating an ongoing expense for producers. Even when plants reopen, the supply of slaughter-ready, heavy-weight animals will weigh on prices for months.

Futures contracts that represent upcoming deliveries tumbled to rock-bottom prices. June live cattle traded Friday for 86 cents per pound, while May lean hogs garnered a mere 37 cents per pound, the lowest price in almost 18 years.

Oil Market Drills Deeper

Crude oil collapsed under $18 per barrel on Friday, the lowest level since 2001. Prices are crumbling as storage tanks across the United States are filling up, leaving producers with nowhere to move the petroleum they continue to pump.

Prices are now down more than 70% this year as billions of people stopped driving and flying due to coronavirus concerns. Coupled with a month of overproduction by Russia and Saudi Arabia, falling demand has led to a massive oil glut.

Financial markets seem to think the current situation won’t last. While oil for immediate delivery is near $18 per barrel, contracts in December are valued near $34. This reflects an expectation that drilling by American producers and OPEC countries will drop and a hope that demand could rebound later this year. If these adjustments don’t materialize, future prices could see a similar collapse below $20 as well.